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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 36942
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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If I file chapter 7 personal bankruptcy, do I loose my LLC

Customer Question

If I file chapter 7 personal bankruptcy, do I loose my LLC too. Can the trustee liquidate my business, its my only source of income
Submitted: 6 years ago via ExpertHub.
Category: Bankruptcy Law
Expert:  socrateaser replied 6 years ago.

If your LLC is truly a separate entity, because you don't commingle your personal assets and expenses, wiith your business, then there is little likelihood that the trustee would attempt to prove that the LLC is being used to keep property from the reach of your creditors. But, if you don't keep the LLC separate, or you have recently transferred substantial assets to the LLC as a means of defeating your creditor's claims, then you could be into a fight to prove the LLC's separate existence.


The botXXXXX XXXXXne is that typically the trustee has no power over the LLC. But, your conduct in operating the LLC could change that situation.


Hope this helps.


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Customer: replied 6 years ago.

So since I have not transferred any assets to my LLC and I have not personally gtd any debts in my LLC. My LLC is safe???


Thank you ,

Expert:  socrateaser replied 6 years ago.
Based on everything I know about bankruptcy law: yes.

Edited by socrateaser on 12/27/2009 at 9:33 PM EST
Customer: replied 6 years ago.

So do I have to list it on the bankruptcy paperwork? Or is it considered a totally separate entity


You have been really helpful


Promise last question

Expert:  socrateaser replied 6 years ago.

I think I need to clarify some things for you first. An LLC is a separate legal entity which is controlled by its operating agreement. Generally, the bankruptcy trustee is not permitted to assume management and control of the LLC, but it is entilted to the assets, profits and distributions.


This leaves you with some decisions to make, because if your LLC has a lot of valuable property, then should you ever decide to liquidate, the bankruptcy trustee will have the right to take those assets and distribute them to the creditors. Also, if you are paying yourself as an employee, then you are entitled to your wages. But, if you are taking distributions, based upon your ownership, rather than based on your personal efforts, then the trustee can demand the proceeds.


In short, you may be better off creating a new entity and starting from scratch, than to continue operating your existing LLC -- or, at a minimum, treating yourself as an employee and paying yourself a salary.


In answer to your direct question, you must list your ownership interest and its value, because that is an asset.

Customer: replied 6 years ago.

sorry now I am confused


I own two tanning salons, which right now are not making a profit, they are in my LLC. The only assets of the salon are the computers, and the tanning beds. There is no real estate assets, and min money in the bank account. I am making enough to make payroll and pay the utilites because it is off season. We purchased these on an owner finance agreement so no cash was exchanged. I am making payments under the LLC to the prior owner.


So am I at risk of having the trustee take the tanning beds out of my salon and sell them to pay off creditors? that would virtually close down the business.


I am not getting a pay check, but I am also not taking any money at this time. In January I am planning to start to take a pay check bi weekly like the rest of the staff.


What do you recommend??? I cant loose my salons, or I will loose my only source of income

Expert:  socrateaser replied 6 years ago.

You may want to consider ensuring that your operating agreement separates ownership/economic interests from management powers. Then, as long as you don't authorize the distribution of any assets, the trustee cannot take them. And, the trustee cannot take your salary, if you are paying yourself wages.


Moreover, if your LLC is losing money, then that is not good for the trustee, so the trustee may "reject" rather than assume the operating agreement. If so, then you get the business, and that ends the issue permanently. Only if the trustee decides to assume the operating agreement, does the trustee retain the rights to the assets.


You may want to discuss this with local bankruptcy counsel. For a referral, see: and

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